A. Field of the Invention
The present invention relates to a computer system and method for modeling and administrating a deferred award instrument plan.
B. Background of the Art
Increased competition among companies has led to the granting of benefits such as deferred awards, stock options, life insurance and deferred compensation as a tool to both recruit and maintain highly skilled labor. Stock options are used as forms of compensation that reward employees for their labor. Employer corporations grant employees the right to purchase stock in the employer at a fixed price. As new products or services are introduced and the stock price rises, the employee's stock options become more and more valuable. This option, for example, may be given for past service or as incentive for future performance.
The granting of benefits such as stock options involves certain issues related to benefits measurement and timing. The price at which the employee has the right to purchase the stock or other benefit (which is also the value of the benefit when received) is hereinafter referred to as the Grant Price. If the options are not exercised in a predetermined period of time, they often lapse. The difference between the Grant Price and the trade price of the stock in the appropriate exchange, or the benefits received by way of deferred compensation or life insurance (hereinafter “Market Price” of “FMV”) is referred to as the gain.
There are several different types of stock options or benefits that can be granted. Options may be Qualified, commonly referred to as Incentive Stock Options (ISO) that are governed by Sections 422, 424, Deferred Compensation Section 83, and Deferred Compensation Section 457, proposed Section 459, and other benefit provisions of the United States Tax Code. Options may also be Non-Qualified, commonly referred to as Non-Qualified Options (NSO).
There are numerous reasons why it is not desirable to issue too many stock options and/or have them exercised. First, the limited life of most options has cash liquidity ramifications on the employee. The selling of stock to cover stock option costs by key employees can have a negative impact on the company.
A second downside to receiving benefits are taxes. If the benefits are received while the employee is alive, the gain is immediately subject to ordinary income tax. For the benefit that is held, the amount of appreciation over the gain is subject to capital gains taxes when it is ultimately sold. The gain on the stock or benefit that is not held and sold immediately upon exercise of the options is subject to ordinary income tax. Alternative minimum tax is applicable to the gain of an ISO or benefit when it is received and capital gains tax is applicable on the difference between the Grant Price and the ultimate sales price of the stock or benefit.
If an NSO or ISO is not exercised when the employee is alive, the added burden of estate tax must also be computed. For example, an employee's family can expect to receive only 12% of the proceeds after taxes on a stock option that has a Market Value that is twice the grant price. The greater number of options awarded the larger the problem becomes. If an employee does not have enough cash to satisfy the Grant Price and taxes associated with an exercise, the employee is forced to sell stock, which only aggravates the tax consequences and reflects poorly on the company.
Many of the issues associated with stock option plans are also present with other benefit and deferred compensation programs offered by companies today. Additionally, conventional benefit and deferred compensation programs are difficult to bring into compliance with Financial Accounting Standards Board (FASB) and International Accounting Standards Board rules (IASB) (FAS 87, 106, 123, AO 25 and IAS 19). Many of these programs also require a significant outlay by the company to compensate or reward an employee or member. These outlays can detract from a company's bottom line in the near term. What is therefore needed in the art is a new program, method and apparatus by which a company can compensate its best employees over an extended period, thus minimizing the employees' tax consequences, while at the same time allowing the company to take maximum tax deductions and recoup many of the costs associated with the administration of these compensation programs and bring programs into harmony with FASB and IASB.